Friday, August 8, 2014

Market Week Wrap-up

- Geopolitical events dominated the conversation again this week, as turmoil in
Israel, Ukraine, Iraq, and West Africa provided plenty of dramatic,
market-moving headlines. In the meantime, negative Italian Q2 GDP and worrying
German industrial data cast a shadow over Europe, while the Nikkei fell 5% on
the week thanks to weaker-than-expected July numbers. Most of the June quarter
corporate earnings reports are in the can, leaving just a few retailers and
some big tech names to report next week. At the end of a volatile week, the
DJIA ended up 0.4%, the S&P500 gained 0.3% and the Nasdaq tacked on 0.4%.

- The Ebola outbreak in West Africa has become very serious this week, and the
World Health Organization has declared it a major public health risk requiring
a coordinated global response. The disease has begun to appear in Nigeria,
where the government declared a state of emergency, and there are concerns it
could spread beyond Africa. Cases of people with Ebola-like symptoms have been
reported in the US, Europe and Saudi Arabia, but no cases have been
conclusively proved. Shares of Canadian biotech Tekmira have gained another 40%
this week after the FDA partially lifted its clinical hold on the firm's
experimental anti-Ebola viral therapeutic. Biocryst, which is also working on a
treatment for Ebola, is up 15% on the week.

- In the first half of the week, there were mounting fears that Russia was
moving closer to invading Ukraine after authorities in Kiev and NATO figures
said Moscow had built its forces back up to around 20,000 troops (plus the
20,000 troops stationed in Crimea). The thought was that Moscow would introduce
troops under the guise of a "humanitarian mission" after many armored
units were seen with "peacekeeping" markings painted on their vehicles.
However on Friday there were sudden signs of fresh de-escalation as the
chairman of the Russia Security Council said his country would like to find
ways to "de-escalate the Ukraine situation" and Moscow ended
scheduled military drills and stated that air and air defense units have been
ordered back to their home bases. Nevertheless, the political battle of wills
continues and Russia imposed countersanctions on the West, banning a broad
range of food imports.

- Within a few hours of each other, two huge M&A deals fell apart this
week, while a third was altered to remove a tax inversion component following
strong political pushback. 21st Century Fox abandoned its $80 billion offer to
acquire Time Warner, citing hostility to the deal at Time Warner and reluctance
to overpay. Sprint abandoned attempts to reach a deal to acquire T-Mobile,
costing CEO Dan Hesse his job. Walgreen said it would go ahead with buying up
the rest of Alliance Boots it does not already own but abandoned plans to move
its tax address abroad.

- Media names CBS and Disney both saw very solid quarterly reports that topped
expectations. Disney reported strong Q2 revenue growth, although the results
were not quite as good as results seen in Q1. News Corp disclosed a mixed set
of Q4 results, missing the consensus EPS estimate for the first time four
quarters but beating on revenue. Revenue and earnings sagged on a y/y basis.

- Shares of luxury goods names Coach and Michael Kors were closely watched
after quarterly reports. Kors widely beat top- and bottom-line expectations,
saw a 24% gain in comps and raised its FY15 outlook. But on the conference
call, executives warned that margins would suffer going forward due to
increased markdowns and disclosed a big increase in inventories. Coach also
topped earnings and revenue expectations, with the international business
strong and Chinese comps up by double digits, even as North America comps
sagged.

- Solar names soared on very good results out of solar power installer
SunEdison, which reported decent profits (beating expectations for a big loss)
and revenue swelled 61% y/y. SunEdison said it completed more projects in the
quarter than it had expected, goosing results higher. Earlier in the week First
Solar had widely missed expectations and saw earnings and revenue sag on a y/y
basis, although SUNE's 15% post-earnings gain helped pull FSLR up nearly 10% on
the week.

- The Fed cleared Bank of America's resubmitted capital plan. Recall that back
in April, the Fed directed the company to resubmit its CCAR application after
it emerged that the bank had incorrectly reported data used in the calculation
of regulatory capital ratios. The Fed approval allows BoA to go ahead with its
plan to boost its dividend to $0.05 per share from $0.01 per share.

- The ECB left its policies unchanged at the August meeting. While
acknowledging ultra-low inflation and slowing economic prospects, ECB President
Draghi continued to affirm his confidence that the ECB's June measures would
ultimately push prices and growth higher over the medium term. During the press
conference, Draghi pushed back against criticism that the ECB is not doing
enough by further detailing the TLTRO program, asserting it will disburse up to
€450-850B to the real economy. On Ukraine, Draghi warned the conflict had the
real potential to negatively impact the Eurozone.

- Italy's economy unexpectedly contracted in the second quarter, deepening
fears that a wider economic slowdown is under way in Europe. Italy GDP was
-0.2% q/q and -0.3% y/y, after a final Q1 GDP reading of -0.1% q/q and -0.5%
y/y , marking a rare triple dip recession. Germany, France and the Eurozone
report initial Q2 GDP figures next Thursday. There are real concerns about the
German data after Germany reported June factory orders -2.4% y/y on Wednesday
and June industrial production -0.5% on Thursday, after which the two-year bund
yield fell below zero for the first time since May 2013 and the 10-year bund
yield fell to an all-time low below 1.07%. EUR/USD hit nine-month lows below
1.3340.

- In Japan, the strengthening yen and disappointing July economic figures sent
the Nikkei225 down by nearly 5% this week. Despite speculation of a rift in the
policy board, the BoJ's latest statement retained its unanimous stance on key
policy settings even as the assessment of exports and industrial output were
downgraded, as both have "shown some weakness." The BoJ still cheered
improvement in employment and income situation along with some signs that
consumption tax headwinds are starting to abate. Government bond yields in
Tokyo have plunged to new lows, with the 10-year falling to a 16-month low of
0.5%.

- After two straight weeks of strong gains, the Shanghai Composite was down
0.3% this week, a modest decline against the backdrop of volatility in the
emerging markets. A very strong set of China trade data helped restore markets
on Friday. July's $47B surplus was the biggest on record, and even though
imports fell, a 14% rise in exports more than made up for that decline.
Shipments to Europe were particularly strong, up about 17% y/y, while exports
to Japan reversed last month's drop with a 3% increase. The stream of economic
data from China continues with the release of July inflation figures late on
Friday.